Contracts for future delivery of currency as risk avoidance

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Reference no: EM131953361

Suppose that in country X, the culture is one that avoids risk and frowns on gambling. Suppose the country uses the US dollar in its international transactions, and a firm in X buys a product from Europe, which it will take delivery of in 60 days and for which it will have to pay 100,000 euros at that time. The firm does not know how many dollars will be needed in order in to obtain those 100,000 euros 60 days from now by transferring risk at the present time to be a speculator. The speculator takes the risk, because he or she is expecting that the actual costs of those euros (in terms of dollars) will be less 60 days from now than what the speculator promises to the firm. As a result, the speculator profits from the price differential. Some in country X view contracts for the future delivery of a currency (forward contracts) as risk avoidance, but others view it as gambling. What do you think?

Reference no: EM131953361

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